CHAPTER 7

CASH
BUDGET
 INTRODUCTION
• Cash budget occupies an unique position in the financial management of a
modern business enterprise, particularly in enterprises running on large scale. It
makes certain that the business has sufficient cash available to meet its needs as
and when they arise. Cash budget shows cash receipts from all sources of business
and all payments and also the resultant cash balance for a definite future time
period, which is generally accounting year.
• In short, cash budget is a plan showing the cash position of business at different
time intervals during the year. Even though sales budget and production budget
have been very carefully framed; the business would be put to difficulties if
proper attention to cash position is not paid.
• Generally, cash budget is derived from other budgets. Hence, other operating
budgets are prepared first and then only the necessary figures of receipts and
payments are obtained for preparing cash budget. In first of cash budget,
estimates of Cash Receipts are shown whereas in second part, estimates of Cash
Payments are shown. Thus, on the basis of budget the position of cash at
different period of time will be available.
 ADVANTAGES OF CASH BUDGET
• Planned Use of Cash
• Provision for Capital Expenditure
• Investment of Surplus Funds
• Dividend Policy
• Profitable Use of Cash
• Timely Payment of Debts
• Arrangement for Obtaining Funds
• Useful for Control
• Helps Co-ordination
• Easy to Obtain Funds
 LIMITATIONS OF CASH BUDGET

• Estimates are Difficult

• Carelessness in Implementation

• Rigidity

• Expensive
METHODS OF PREPARING CASH BUDGET
• Receipts and Payments Method (Receipts and
Disbursements Method)

• Adjusted Earnings Method (Adjusted Profit and Loss

Method)

• Balance Sheet Method (Balance Sheet Projection

Method)

• Working Capital Differential Method

 RECEIPTS AND PAYMENTS METHOD
• This is most widely-used and popular method of preparing cash budget. The
estimates under this method may be divided into weekly, fortnightly or monthly
basis. The method is of particular importance in business where sale is unstable,
or seasonal or which suffers from shortage of liquid resources. Due to its
flexibility, this method is used in planning cash at various time periods and thus
helps in controlling cash disbursements.
• Estimating Cash Receipts: The sources of cash receipt in a business are generally
sales, non-operating incomes like interest and dividend as well as capital
transactions like sale of assets and issue of shares and debentures. The first step
in preparing a cash budget under this method is to estimate the sales; as sales is
the most important source of cash receipts. Once the total sales are estimated, it
is very easy to put down the figures of cash sales. From the past experience, the
proportion of cash sales can be determined. Any changes likely to occur in the
future budget period are taken into account. There is no time-lag between sales
and receipts in respect of cash sales.
 RECEIPTS AND PAYMENTS METHOD (CONT.)
• Estimating Cash Payments: Cash payments generally consist of payment to
creditors on account of credit purchases, payment of wages, overhead expenses,
dividends, capital expenditures like purchase of assets, repayment of loans, etc.
the estimates on various accounts are based on various operating budgets. E.g.,
payments to creditors are estimated on the basis of purchase budget, for wages
and factory overhead, the basis will be production budget, etc.
• The closing cash balance every month will be available by deducting total cash
payments from cash receipts. This gives an idea of either cash balance or cash
deficiency and in the latter case, the finance manager will have to make
arrangement; for bank overdraft. There are two factors which determine
whether the cash balance is enough or not: First, the actual payments to be made
next month and the actual timings of such payments. For example, if the
collection from sales is available only after 15th of the month, then enough cash
balance must be maintained for meeting payments for the first 15 days.
• Solution: Cash Budget for 3 months from June to August
Particulars June July August
Opening Cash Balance 1,00,000 1,09,500 99,775

Add: Receipts
(1) Collection from debtors 80,000 76,500 78,500
Total Receipts (A) 1,80,000 1,86,000 1,78,275

Less: Payments
(1) Selling Commission (5% of sales) 4,000 3,825 3,925
(2) Purchase of Machine --- --- 65,000
(3) Payment of Dividend --- 15,000 ---
(4) Payment to creditors 41,000 40,500 38,500
(5) Wages 5,400 4,800 4,700
(6) Factory Expenses 5,100 5,100 6,000
(7) Administration and Selling Expenses 15,000 17,000 13,000
Total Payments (B) 70,500 86,225 1,31,125
Closing Cash Balance (A – B) 1,09,500 99,775 47,150
2
• Solution: Cash Budget for 3 months from April to June
Particulars April May June
Opening Cash Balance 60,000 1,67,000 2,70,500

Add: Receipts
(1) Cash Sales (40% of total sales) 2,60,000 3,60,000 2,00,000
(2) Collection from debtors (W.N. – 1) 3,15,000 3,30,000 4,65,000

Total Receipts (A) 6,35,000 8,57,000 9,35,500

Less: Payments
(1) Payment to Suppliers 2,70,000 3,30,000 4,80,000
(2) Overhead Expenses (Excl. depreciation) 90,000 1,12,500 1,05,000
(3) Payment of Wages 1,08,000 1,44,000 1,50,000
(4) Debenture Interest -- -- 37,500

Total Payments (B) 4,68,000 5,86,500 7,72,500

Closing Cash Balance (A – B) 1,67,000 2,70,500 1,63,000

3
• Solution: Cash Budget for 3 months from July to September
Particulars July August September
Opening Cash Balance 10,000 42,500 47,500

Add: Receipts
(1) Cash Sales (20% of total sales) 1,00,000 1,40,000 1,60,000
(2) Collection from debtors (W.N. – 1) 2,80,000 3,60,000 4,88,000

Total Receipts (A) 3,90,000 5,42,500 6,95,500

Less: Payments
(1) Payment to Suppliers 2,10,000 2,40,000 2,70,000
(2) Payment of Manufacturing Expenses 62,500 75,000 87,500
(3) Payment of Other Overhead Expenses 75,000 80,000 95,000
(4) Purchase of Machine --- 1,00,000 1,00,000
(5) Payment of Dividend --- --- 50,000
Total Payments (B) 3,47,500 4,95,000 6,02,500

Closing Cash Balance (A – B) 42,500 47,500 93,000

8
• Solution: Cash Budget for 6 months from January to June
Particulars January February March April May June
Opening Cash Balance 1,20,000 2,69,850 3,05,700 1,96,050 1,24,400 1,58,750
Add: Receipts
(1) Cash Sales 45,000 60,000 60,000 90,000 75,000 60,000
(2) Collection from debtors 3,35,250 2,18,250 1,95,750 1,73,250 2,34,000 2,29,500
Total Receipts (A) 5,00,250 5,48,100 5,61,450 4,59,300 4,33,400 4,48,250
Less: Payments
(1) Payment to creditors 1,92,000 1,92,000 2,88,000 2,40,000 1,92,000 2,88,000
(2) Salaries and wages 36,000 48,000 60,000 62,500 50,000 42,000
(3) Interest on Debentures -- -- 15,000 -- -- 15,000
(4) Advance Payment -- -- -- 60,000 -- --
(5) Purchase of Machine -- -- -- -- -- 36,000
(6) Payment of Rent 2,400 2,400 2,400 2,400 2,400 2,400
Total Payments (B) 2,30,400 2,42,400 3,65,400 3,64,900 2,44,400 3,83,400
Closing Cash Balance (A – B) 2,69,850 3,05,700 1,96,050 94,400 1,89,000 64,850
Add: Borrowed Loan -- -- -- 30,000 -- 60,000
Less: Repayment of Loan -- -- -- -- (30,000) --
Payment of Interest on Loan -- -- -- -- (250) --
Closing Cash Balance 2,69,850 3,05,700 1,96,050 1,24,400 1,58,750 1,24,850
4
• Solution: Cash Budget for 3 months from October to December
Particulars October November December
Opening Cash Balance 1,00,000 74,000 4,000

Add: Receipts
(1) Cash Sales (40% of total sales) 96,000 1,28,000 1,12,000
(2) Collection from debtors (W.N. – 2) 1,08,000 1,32,000 1,68,000
(3) Sale of old Machine -- 60,000 --
Total Receipts (A) 3,04,000 3,94,000 2,84,000

Less: Payments
(1) Payment to Suppliers (W.N. – 1) 2,00,000 2,50,000 2,05,000
(2) Payment of Fixed monthly overheads 10,000 10,000 10,000
(3) Payment of Other Overhead Expenses (W.N. – 3) 20,000 30,000 26,000
(4) Purchase of new Machine -- 80,000 20,000
(5) Payment of Income-tax -- 20,000 --
Total Payments (B) 2,30,000 3,90,000 2,61,000
Closing Cash Balance (A – B) 74,000 4,000 23,000
12%
• Solution: Cash Budget for 3 months from April to June
Particulars April May June
Opening Cash Balance 3,20,000 94,400 (81,248)
Add: Receipts
(1) Cash Sales (W. N. 1) 90,000 1,08,000 1,44,000
(2) Collection from debtors (W. N. 1) 2,52,000 3,24,000 3,96,000
(3) Income Tax Refund --- 1,20,000 ---
(4) Interest Received on Fixed Deposit (W.N. 6) --- 9,552 ---
(5) Dividend Received (W. N. 8) --- --- 3,75,000
Total Receipts (A) 6,62,000 6,55,952 8,33,752
Less: Payments
(1) Cash Purchase (W. N. 2) 2,25,000 2,70,000 2,25,000
(2) Payment to Creditors (W. N. 2) 1,50,000 2,50,000 3,00,000
(3) Payment of Factory Expenses (W. N. 3) 70,000 70,000 90,000
(4) Payment of Admin. Expenses (W. N. 4) 42,000 59,000 52,000
(5) Payment of Selling Expenses (W. N. 5) 39,000 47,000 55,000
(6) Payment of Installment of Machine (W.N. 7) 41,600 41,200 40,800
Total Payments (B) 5,67,600 7,37,200 7,62,800
Closing Cash Balance (A – B) 94,400 (81,248) 70,952